Seller Financing Benefits Both Sides of Transaction

Posted on

By Scott Bushkie

If you’re considering selling your business, don’t expect to walk away with all cash at close. This isn’t like selling a house. Most deals involve some sort of alternative financing. You may be asked to accept an earn out, roll over a portion of equity, or (most commonly) provide seller financing. 

Even when the M&A market is strong and lenders are aggressively financing business acquisitions, seller financing is often still part of the deal structure. And when there’s a downturn or lenders tighten up, then seller financing is even more prevalent and important.

Seller financing is the bridge between a buyer’s immediate resources and the value they see in your business. Essentially it’s a loan from the seller, the agreement is typically structured with monthly payments over a three to five-year period.

Most of the deals we see have something between 10 percent to 30 percent in alternative financing by the seller. The larger the risk (i.e. customer concentration, the owner “is” the business, or lack of management team), the more seller financing a buyer will request. But seller financing doesn’t just work in the buyer’s favor. Here are four more ways it benefits the seller:

Buyer confidence. Buyers are more comfortable when you’re willing to keep a little skin in the game. A seller who’s willing to bet on a buyer’s success will often be rewarded with a higher business value.

On the other hand, a seller who demands all cash at close may be subject to extra scrutiny during due diligence. I guarantee someone on the buyer’s advisory team is asking, “What does the seller know that we don’t know?”

In fact, we recently had a buy-side client who agreed to a $6 million purchase with all cash at close. The buyer was confident he was getting a good deal and could do something with the business. But during due diligence, we found the seller’s backlog had dried up and he had very little visibility into future sales. EBITDA was dropping from $1.5 million to $1 million or less.

The buyer was willing to honor his original purchase price, provided the seller was willing to take a portion as a contingency payment, tied to future sales. The seller very boldly said absolutely not. He wanted all cash at close or no deal. He got the latter.

Flexibility. The more flexible you can be with the deal structure, the wider your buyer pool. Your best buyer may not be a good fit for full conventional lending, but they may have the experience and drive to grow your business.

Taxes. Depending on how the deal is structured, an all cash at close arrangement could push you into a higher tax bracket. But spreading out your payments over time can potentially lower your tax liability and put more money in your pocket at the end of the day.

Interest rates. You can set your own interest rate strategy. Offering rates below market can make your company more attractive. Alternately, most of my clients offer rates slightly above the bank’s. You might be able to charge six, seven or even eight percent interest and generate additional income from the buyer.

← Back